Most people think of self-expression via their homes as using your paint colors and decor choices — or even home style and neighborhood — to customize their living spaces or project a particular personal style in a way they couldn’t have done while renting.
In a previous column I explored some recession-era changes in how Americans express themselves through their homes, from those who are conscientious (and vocal) objectors to the institution of homeownership entirely, to those who are intentionally buying smaller, more modest homes than they can actually afford, in part to make their fiscal conservatism apparent to onlookers.
In his book "What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions" (McGraw-Hill, 2010), which serves as the basis for this nine-week series of columns (this is No. 3), professor Meir Statman points out numerous contradictions in what we humans want in the financial realm.
Status-seeking behaviors drive many of these contradictions, as the very indicators that signal affluence (McMansions, Hummers and investing in art, as examples) can undermine true financial well-being (to wit: supersized mortgage, sky-high gas bills, and losses when the art market turns).
In briefing readers on the unequivocal truth that investors want to pay no taxes, Statman surfaces another strange status-related contradiction in core consumer desires: We want to be in a high tax bracket, for status reasons, but we use our ability to strategize about minimizing the taxes we pay to make other emotional expressions: "We express ourselves as smart, savvy, wily and crafty, which is what it takes to avoid taxes."
Something about taxes and the idea of paying them makes a lot of people a little bit crazy. Statman describes the emotions investors experience around taxes as "extend(ing) to anger and hatred" — e.g., the recent proposal by a federal commission that suggested the mortgage interest deduction be reformed or eliminated to help close the federal deficit.
Barely had the proposal (which was never taken seriously, politically speaking) been uttered before the real estate, mortgage and banking industry issued a hue and cry.
While that was only to be expected, what was more curious from the perspective of homebuying behavior and decision-making was one of the industry arguments: that the elimination of the mortgage interest deduction would actually stop masses of people from owning homes.
This argument, which I think might be correct for some number of people, can be looked at from two points of view. The first? That the subsidy of homeownership via the mortgage interest deduction would effectively make ownership more expensive, pricing many would-be owners out of the real estate market.
I buy that.
But the second perspective is that there are many renters for whom the lure of the tax break is the tipping point that pushes them from renters to owners.
In light of the truth about human emotions and taxes, as articulated by Statman, I buy that, too. That this is so for a massive number of people, I think is debatable.
The power of tax avoidance is enough to make people lie, commit crimes, and risk property and freedom — so, sure — I believe it’s also strong enough to make someone buy a home who would not otherwise have done so.
It also makes people who want to buy someday buy sooner once they have a high-enough income that the tax advantages of homeownership would significantly reduce not their net expenses, necessarily (because the total costs of ownership might greatly exceed what they are paying for rent), but their tax bill.
The idea of letting the hated tax man help defray your housing costs is highly attractive. And to those in a certain tax bracket, the tax advantages of homeownership (which, by the way, also include a hefty capital gains tax exemption and a deduction for property taxes) are so ingrained in our national belief and value systems that define what owning a home means in America that they actually read as a penalty on renting — for better or for worse, accurately or not.
Opponents of the concept that tax advantages cause people to buy homes point out that many of the homeowners who are eligible for the mortgage interest deduction don’t even itemize their taxes, which is necessary to claim it! But that fact doesn’t disprove that the deduction served as powerful motivation for these non-claiming homeowners to buy homes in the first place; rather, it just renders their decision-making in this regard uninformed (at best) or irrational (at worst).
Irrationality when it comes to taxes is by no means limited to real estate consumers. In "What Investors Want," Statman cites the example of Leona Helmsley, who had so much surplus money she left millions to her dog, but dodged taxes to avoid being one of the plebeian, populist ranks of " ‘little people’ who pay taxes."
Statman also points out that many an investor will avoid doing something to make $5,000 in order to avoid $4,000 in taxes — the stock market counterpart to the person who overextends herself to take on a too-large mortgage in order to get the tax deductions.
When it comes to homeownership, the tax advantages are one very significant consideration to be factored into the "own or not" decision analysis. They render ownership more affordable and can even impact your career decisions, by virtue of changing your tax picture at higher income brackets.
But given the other, weighty lifestyle implications and financial obligations ownership creates, taxes should not be the primary reason anyone buys a home.